Insurance consumers would be worse off under changes: adviser body

NZ advisers' incentives are "extreme", the report says. Photo iStock.

Insurance consumers would be worse off if financial adviser commissions were slashed because banks would become the dominant players, a body representing insurance advisers says.

Yesterday the Financial Services Council released a report by actuarial firm Melville Jessup Weaver claiming people who insure their lives may be being moved between insurers unnecessarily because of the high commissions paid to advisers.

The report found advisers were being paid up to 200 per cent of a policy's first annual premium as an upfront payment and up to half of all new policies sold were to people who already had life insurance.

That compared with just 10 per cent of new policies sold through banks.

Report authors Mark Weaver and David Chamberlain said New Zealand was out of step with other countries and proposed changes including scrapping the up-front commissions for advisers switching a consumer to a different insurer within a seven-year period and reducing the up-front commission for new customers from up to 200 per cent of the first year's premium to 50 per cent.

But David Yates, general manager of the New Zealand Financial Advisers Association, whose members are mainly insurance advisers, said the proposed changes would be to the detriment of consumers.

"We would be left with a market dominated by bank distributed insurance where consumers are not given choice (banks typically have only one supplier) and with no access to quality professional insurance advice.

"That would be like turning the clock back 30 years to the pre-regulation environment.

Yates said the report had focused on the wrong aspects of the industry and it was not clear what problem the report was trying to solve or even if there was a problem which needed solving.

"In focusing on replacement business as a specific problem that needs solving (rather than a symptom of a competitive marketplace) it is our view that it focus's attention on the wrong aspects of the industry."

The report said the reason why it was looking at the industry now was because the Financial Advisers Act was under review and because of a focus by the market watchdog on how conflicts of interest are managed.

It pointed to the Financial Market Authority's 2015 strategic risk outlook which noted that if conflicts of interest were not properly identified and managed they could "undermine market integrity" and result in "poor investor outcomes".

"When conflicts of interest are combined with information asymmetries, it can be difficult for investors to know whether a market participant is acting in their best interests.

"Remuneration and incentive arrangements can also reinforce conflicts of interest, particularly when sales staff are remunerated on a volume basis or through certain bonus structures."

The release of the report has caused ructions for the Financial Services Council - a body which represents the major banks and insurers - with four of its members deciding to walk out.

Partners Life, Fidelity Life, AIA and Asteron Life have resigned their memberships.

The parties are understood to be upset over the report's focus on changes to the adviser distribution model a move seen to favour the banks.

In a statement Fidelity Life chief executive Milton Jennings said the company was committed to working with advisers and fostering positive change for the industry's future, but the events of the last week had required a change of direction in seeking to achieve this through the FSC.

"Our preference was to stay at the table in order to facilitate discussion that would ultimately benefit advisers and the greater industry.

"Regrettably however this has now become untenable."